Ian Rosmarin discusses a relatively new tax that is largely unknown to those who need to know about it the most. They might be your neighbour, your in-laws or your best friend. So read on ….

If you live in London there is a reasonable chance that you know someone who owns a £2m+ UK residential property held in a company.

There is also a good chance that neither you, nor the owners of these properties have ever heard of “ATED”, the Annual Tax on Enveloped Dwellings which came in to effect on 1 April 2013.

So at the risk of being shot as messenger, you would be doing the unwary a great favour by suggesting they find out about ATED. And haste-post-haste at that!

What then is ATED? And why was it introduced in the first place?

Taking the second question first, you are probably aware that there have been Stamp Duty avoidance schemes around for years. HMRC are now attacking these with some energy and many of those who entered in to them are bitterly regretting ever having done so.

What did seem to work though for many years was the practice of putting a property in to a company (thus an “enveloped” dwelling) and, in time selling the company to a buyer instead of selling them the property. The buyer then became the owner of typically 100% of the shares of a company with a UK property in it and in practice this seemed to make little or no difference. He will however have paid Stamp Duty at only ½% (the rate that applies to the sale of a company’s shares) instead of Stamp Duty Land Tax at up to 5% and more recently even 7%. In the early years this practice tended to be restricted to the highest value properties with relatively sophisticated buyers involved, but with time it became more common currency and given the tremendous growth in property values, particularly in London, government could see that it was losing out on significant revenues. It decided to act.

ATED was introduced with effect from 1 April 2013 and is a tax on £2m+ UK residential properties held within companies. (For “companies” also read partnerships with at least one corporate partner and certain types of collective investment vehicles such as unit trusts.) Subject to certain Exemptions (see below) such companies have to file an annual ATED return and subject to certain Reliefs (see further below) they must pay an annual tax. The combined filing and tax payment date is normally 30 April following – unusually – the beginning of the tax year. ATED thus requires both filing and payment of tax almost a year in advance and of course there are penalties for both late filing and late payment!

How much?

Tax is due as below based not on the property’s current value but on its value at 5 April 2012, or the date of purchase if later. These values should hold good for 5 years before properties will need to be valued again for ATED purposes.

Property value at 1 April 2012 (or date of purchase if later)

Annual Tax

£2,000,000 – £5,000,000

£15,000

£5,000,001 -£10,000,000

£35,000

£10,000,001 – £20,000,000

£70,000

£20,000,001 +

£140,000

Exemptions

Care Homes, Hotels, school and university accommodation, etc do not fall within the scope of ATED net. There are also specific exemptions from ATED for properties held by Charitable companies, Public and similar bodies, etc, though all subject to conditions. In these cases no ATED tax return form is required.

Reliefs

The following will, subject to conditions, pay no ATED tax but an ATED tax return is still required in order to claim the reliefs. Again penalties apply for late or non-filing of returns.

Rented properties (must be let at market rates and not occupied by connected parties)

Properties which are part of a property developers trade

Properties for the use of employees of the enveloping entity

Historic houses open to the public

Working farmhouses

Properties acquired by a financial institution in the course of its lending business

Properties owned by a provider of social housing.

Worse to come folks!

Not content with the above, the 2014 Budget announced that ATED is to be extended to properties with values as low at £500,000. This does not buy very much real estate in London these days and the type of property owner that will now be caught within ATED is a far cry from the originally targeted sophisticated international property investor and their bank of advisers who would have informed their clients of their ATED obligations almost as soon as they came off the press last year. The new bands to be introduced are:

From 1 April 2015 ……..

Property value at 1 April 2012 (or date of purchase if later)

Annual Tax

£1,000,000 – £2,000,000

£7,000

And from 1 April 2016 ……..

Property value at 1 April 2012 (or date of purchase if later)

Annual Tax

£500,000 – £1,000,000

£3,500

So pity the unrepresented first time buyer who was talked in to purchasing a property held in a company by the promise of an attractive Stamp Duty saving, or the small scale overseas investor who probably still has no idea of what is going to hit him or her when HMRC catch up with them. Typically this sort of property owner has no need for a UK accountant and may well be completely oblivious to their obligations under this new tax.

So in the interests of good neighbourliness, do steel yourself and tip them the wink. They will be ever grateful to you (in the end!).

And what is that I hear you say? ATED-related Capital Gains Tax as well! But that is another story ……